Diageo in £315m threat to USL shares

Diageo could stand to lose shares worth £315 million from its Indian subsidiary United Spirits (USL) if “adverse” rulings are taken on legal proceedings against its former holding company.

Diageo’s London headquarters (Photo: Wiki)

The 10 million USL shares in question were purchased over from holding company UBHL in July 2013 for R32.35 billion (£315m). This was part of a £1.85bn takeover that began with an initial share purchase announced in November 2012 and culminated in a final share purchase in June 2014, which gave Diageo a majority stake of 54.8% in the Indian spirits producer.

However, this share purchase is facing legal challenges by various lenders to UBHL, who argue that UBHL, under the leadership of its controversial chairman Vijay Mallya, has defaulted on its loans.

Diageo stands to lose its title to the 10m shares it bought as part of its takeover if the Indian courts find in favour of these lenders, the company told shareholders in its annual report.

“Adverse results for Diageo in the proceedings… could… ultimately result in Diageo losing title to the 10,141,437 USL shares acquired from UBHL,” the company revealed. At current exchange rates, these shares are worth roughly £315m.

However, Diageo insists that it will still be the controlling shareholder in USL, even if it looses its majority stake.

“Diageo believes it would remain in control of USL and be able to consolidate USL as a subsidiary regardless of the outcome of this litigation,” it said.

Five litigations were standing against UBHL before Diageo announced its share purchases in November 2012. Diageo was given High Court permission to begin these purchases, despite the cases against UBHL.

However, this permission, or Leave Order, did not extend to subsequent litigations that have emerged since November 2012, for which Diageo is liable.

“Additional winding-up petitions have been brought against UBHL since November 9 2012, and the Leave Order did not extend to them,” Diageo said.

A spokesperson for Diageo told db that it believes the court’s decision to allow the post-November 2012 litigations to threaten Diageo’s shares was wrong:  “The decision was wrong in law and based on erroneous findings by the Appeal Court. Diageo continues to believe that its purchase of USL shares from UBHL is genuine and bona fide. Beyond that, it is not appropriate to comment on ongoing court proceedings.”

In April last year, the Diageo-controlled board of USL said that it had “lost confidence” in Vijay Mallya and called for him to resign. It cited alleged financial violations revealed by a probe into the company’s accounts by PwC.

This probe accused Mallya of “improperly advancing” funds from parts of his business portfolio to his now defunct Kingfisher Airlines company between 2010 and 2012.

Update (14/09/15): This story has been corrected to clarify the exact timings of Diageo’s share purchases.